Diamond Foods snacks on Pringles with $1.5 billion buy

BANGALORE (Reuters) - Diamond Foods Inc DMND.O plans to buy Pringles from Procter & Gamble Co (PG.N) for $1.5 billion in stock, tripling the size of a company that has been binging on snack foods while marking P&G’s long expected exit from the food business.

Pringles, known for its potato chips sold in more than 140 countries, will expand Diamond’s global footprint and more than double its sales in the United States and the UK — making it the second biggest snack foods company in the world behind PepsiCo Inc PEP.N.

Shares of Diamond Foods rose as much as 12 percent on Tuesday.

The deal, which follows Diamond’s acquisition of snack foods brands such as Pop Secret popcorn and Kettle chips in the past few years, gives it a stronger foothold in a fragmented market dominated by PepsiCo’s PEP.N Frito-Lay snack business.

According to market research firm Euromonitor International, Pringles was the fourth biggest snack brand in the world in 2009, after Lay’s, Doritos and Cheetos — all owned by PepsiCo.

“It is still a fraction of Frito-Lay’s snack business, literally about one-tenth of the size,” said Janney Capital Markets analyst John San Marco.

“Aside from Frito-Lay, there are no other real true global powerhouses. Pringles is certainly in better strategic hands as part of a dedicated snack business.”

Unlike regular chips, Pringles does not use whole potatoes, but a dough that has about 40 percent of potatoes to make its snacks.

The sale of P&G’s last food brand — which garners about $1.4-$1.5 billion in annual sales — frees up the household products company to focus on its cosmetics and healthcare units.

The world’s largest consumer goods company, home to brands like Pampers diapers and Bounty paper towels, has been shedding various non-core businesses over the past few years to focus on its higher-growth segments such as health and beauty.

It sold its Folgers coffee business to J.M. Smucker Co (SJM.N) for about $3 billion, in a deal that was structured similar to the Pringles deal. P&G has also entered into a joint venture with generic drugmaker Teva Pharmaceutical Industries Ltd TEVA.O for its over-the-counter business.

TAX-LIGHT DEAL

“I think (the Pringles deal) was as telegraphed as a transaction like this can be,” San Marco said. “Pringles had been a bit of an orphan within Procter’s household and personal care business.”

The deal will see P&G spinning off the Pringles business, which will then be folded into Diamond Foods. P&G shareholders, who can elect to exchange their shares for stock in the combined company, will end up owning 57 percent of the new company, which will be led by Diamond’s Chief Executive Michael Mendes.

The spin off, or “Reverse Morris Trust” transaction, saves on capital gains tax that P&G would have otherwise had to pay in a straight sale.

“I suspect this is probably the best financial outcome P&G investors could have got because there was no other way to avoid a very significant tax liability for selling the business,” Janney Capital’s San Marco said.

Diamond sees net sales of about $1.8 billion in the fiscal year ending July 31, 2012, following the closing of the deal, expected by end 2011.

The transaction will result in a one-time earnings increase for P&G of about $1.5 billion, or 50 cents a share. P&G expects the deal to only reduce annual earnings by 2-4 cents a share, as the stock exchange cuts down the number of outstanding P&G shares.